Presentation of paper

What determines firm growth? The role of demand and TFP shocks

Speaker

Fabiano Schivardi

University of Cagliari

Abstract

Fabiano Schivardi (University of Cagliari) and Andrea Pozzi (EIEF)

We disentangle the contribution of unobserved heterogeneity in idiosyncratic demand and productivity to firm growth. We use a model of monopolistic competition with Cobb-Douglas production and a dataset of Italian manufacturing firms containing unique information on firm-level prices to reach three main results. First, demand is at least as important for firm  growth as productivity. Second, firms' responses to shocks are lower than those predicted by our frictionless model, suggesting the existence of adjustment frictions. Finally, the deviation is more substantial for TFP shocks. We provide direct evidence that sluggish price adjustment influences responses to shocks, magnifying the effect of market appeal  and dampening that of TFP.  Moreover, organizational rigidity within the firm also contributes to reducing the response to TFP shocks, while it has  no effects on that to demand shocks. These findings emphasize the importance of considering both dimensions of unobserved heterogeneity. They also imply that it is more difficult to  fully adjust to TFP  shocks.

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